Economists Line Up To Bash Turkey

ISTANBUL–Turkey had a fast start to the year: its lira hit record lows, borrowing costs surged, and stocks slumped. Two weeks into 2014, it turns out there’s no end to the bad news.

Economists from Morgan Stanley, JPMorgan Chase, Citigroup, HSBC, Standard Bank, BGC Partners and Ak Investment said this week that they were revising their outlook on Turkey–for the worse.

The assault came on all fronts: cuts to economic growth forecasts, deeper currency depreciation expectations, faster inflation outlook, and declining appetite for Turkish assets. The lira slumped to a fresh low of 2.1948 per dollar this week.

Mounting political risks and the rising prospect of tighter monetary policies underline Turkey’s deteriorating economic prospects, analysts said. The country has been hit since May with a double-whammy of domestic and international challenges.

“One of the key pillars of the Turkish story over the past decade has been political stability and the associated implementation of structural and financial reforms,” said Tevfik Aksoy and Ronan Carr of Morgan Stanley. “We see significant downside risks to growth as a result of the political uncertainty.”

Citing deterioration in foreign investor sentiment because of the anti-government demonstrations and the graft investigation, Morgan Stanley said the lira will slump to a new record of 2.3 per dollar in the second quarter and raised its inflation forecast to 7.5% from 6.9%.

Morgan Stanley said it is also reviewing a 3.9% economic growth forecast that faces downward pressure because the central bank will have to raise interest rates to battle economic imbalances. Analysts recommended investors to stay underweight Turkish equities, as well as sovereign, bank and corporate debt. On stocks, they were joined by Citi and JPMorgan, which cut their recommendations to underweight from neutral.

“It appears that there is no magic bullet or quick fix to Turkey’s existing macro and political problems, which complicate the situation; especially for the first half of 2014,” said Ozgur Altug, chief economist in Istanbul at BGC Partners, which cut economic growth forecast to 2.9% from 3.7% for this year.

And some economists paint an even more pessimistic picture.

Istanbul-based Ak Investment cut its GDP expansion forecast to 2.1% from 4%, while HSBC said it expects a pace of 2.2% down from 3.1% previously. Standard Bank, which earlier saw economic growth at 4%, now says it may be 3% or lower. JPMorgan dropped its 2014 GDP expansion outlook to 2.5% from 3%.

“The monetary tightening, including macro-prudential measures, is cutting the growth outlook while the backdrop of tapering makes external financing more expensive,” said strategists led by David Aserkoff at JPMorgan.

Turkey’s borrowing costs, measured by its benchmark two-year bond yields, surged to near two-year high of more than 10% after touching a record low of 4.61% before the Fed’s tapering signal in May. The debt recouped some losses this week to trade at 9.79% Friday.

Economists have also boosted their inflation forecasts to a range of 7% to 8.5% from about 6.5% previously. A leading driver of higher-than-anticipated price increases is the lira, which most analysts now say will plummet to new record lows of 2.3 to 2.4 per dollar in the first half of 2014.

“Renewed pressure on the lira is likely to pass onto consumer prices,” HSBC economists said. “The uncertainty will likely hit consumer, business and investor sentiment and take a toll on economic performance.”

Taking to the airwaves this week, Deputy Prime Minister Ali Babacan and Finance Minister Mehmet Simsek both said Turkey’s economy would grow 4% this year. Mr. Babacan, who is in charge of the economy, said it was too soon to calculate the impact of currency weakness on inflation, declining to provide a revision to the government’s 5.3% year-end forecast.

A spokeswoman from the Finance Ministry declined to comment, citing the ministers’ remarks during the week.